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Startups have flagged their grievances regarding angel tax provision, which they considered was not friendly to them. Photo: iStockphoto
Startups have flagged their grievances regarding angel tax provision, which they considered was not friendly to them. Photo: iStockphoto

Tech startups turn to venture debt as funding volume dips

In recent weeks, more than 100 startups have expressed their interest to raise debt from at least three different venture debt investors

BENGALURU : As early to late-stage startups rush to raise crucial capital to extend their operating runways, many have turned to the venture debt route to finance their working capital and operational expenditure requirements.

In recent weeks, more than 100 startups have expressed their interest to raise debt from at least three different venture debt investors that Mint spoke with. Technology startups in logistics, hyperlocal delivery, agritech, and SaaS segments were the largest seekers for venture debt, investors said.

However, the uptick in the number of startups looking to raise debt, may not necessarily translate into a heightened number of venture debt deals, since debt investors still continue to retain their original thesis and due diligence before closing a deal.

Ishpreet Singh Gandhi, founder and managing partner, Stride Ventures said that the firm has already received interest from 125 startups in the last two months alone. It has already shortlisted around 10 firms for further evaluation. Stride Ventures provides credit to startups at a smaller tenure of 12-18 months, as opposed to 36 months in case of traditional venture debt providers.

“We play role of a debt provider largely focused on working capital requirements, and for certain opex expenses. We provide debt as across both bridge financing and companies raising money at Series A and beyond," added Gandhi.

Stride Ventures recently closed a deal with used two-wheeler marketplace CredR, and had earlier closed its maiden fund worth 100 crore in November, 2019.

While venture debt has increasingly become an important source of funding for startups in the country, many experts and investors warn that the risks remain unchanged for debt deals; especially when many early stage startups are struggling to raise capital due to an on-going funding winter.

The global pandemic is challenging startup valuations due to shifting consumption patterns among consumers, coupled with limited partners (LPs) turning cautious about their fund allocations.

Ashish Sharma, managing director, InnoVen Capital said that venture debt is "never a great option for bridge financing rounds", because industry wide, bridge financing comes with heightened risk. Typically venture debt deals are closed selectively based on a firm’s past equity fundraise, and the total runway remaining, but covid-19 is altering this.

“Venture debt is best suited for on-going funding series (from point of view of startups), and not in a bridge round. But we have very selectively done some deals (past few months) as an exception depending on maturity of the company, and also mainly because we had good level of certainty from existing investors," said Sharma in a phone interview.

Debt investors who evaluate tech startups are also wary about other factors such during the due diligence process as many firms have reportedly delayed payment to vendors, and initiated salary cuts, layoffs, leading to law suits and legal tussles.

However, given the current funding and business environment, investors point out that it is useful to have some venture debt in on-going funding rounds to avoid raising equity at suboptimal valuations.

“Venture debt in any scenario cannot replace equity financing…But in situations where equity is hard to raise and even when available, or when it involves flat or down rounds, many founders find it more attractive to use debt as a plug to reduce dilution (of free equity available)," said Vinod Murali, managing partner, Alteria Capital, a venture debt investor which is currently investing from its 960 crore fund.

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